Cisco fourth quarter mixed; Chambers sees 'unusual uncertainty'

Cisco Systems closed out a strong fiscal year with better-than-expected fourth quarter earnings, but sales fell short of expectations.
Written by Larry Dignan, Contributor on

Updated: Cisco Systems closed out a strong fiscal year with better-than-expected fourth quarter earnings, but sales fell short of expectations. Meanwhile, Cisco CEO John Chambers said there were multiple mixed signals about the economy and the IT spending that goes along with it.

The company reported fourth quarter earnings of $1.9 billion, or 33 cents a share. Non-GAAP earnings were $2.5 billion, or 43 cents a share. Revenue for the fourth quarter was $10.8 billion, up 27 percent from a year ago. Wall Street was looking for earnings of 41 cents a share on revenue of $10.88 billion.

For the fiscal year, Cisco reported earnings of $7.8 billion, or $1.33 a share, on revenue of $40 billion, up 11 percent from the previous year. Non-GAAP earnings for the year were $1.61 a share.

On an earnings conference call with analysts, Cisco CEO John Chambers said the economic picture is looking mixed. "We see the same opportunities and challenges you are reading about," said Chambers. He cited weak GDP, job creation and Europe economic worries as headlining "a large number of mixed signals." Chambers added that the U.S. economy is mixed and large customers agree. In other words, it's a time of "unusual uncertainty." For things Cisco can control, Chambers was very confident. However, the economic picture and its effect on IT spending is uncertain.

Indeed, Chambers said in a statement that he was confident about Cisco's prospects even if the economy slows. He said:

Whether the global economy continues to show mixed signals or not—the strength of our financial model and profit generation serves us well. As we to continue to successfully grow our business and share of IT investments, our focus is squarely on helping our customers accelerate productivity and growth. We are very confident in our strategy.

Chambers projected that first quarter revenue would be up 18 percent to 20 percent compared to a year ago. That growth would put Cisco revenue for the first quarter at about $10.82 billion in a best-case scenario, short of the $10.95 billion expected by Wall Street. Shares fell about 7 percent afterhours. That last leg down came as Chambers talked about the economy.

Cisco also projected gross margins of 64 percent in the first quarter, lower than the 64.8 percent expected.  Meanwhile, Cisco plans to budget its fiscal year in two halves because of the economic uncertainty. Many CEOs in Cisco's customer base just don't have any visibility beyond a few quarters. For instance, orders have been skittish based on economic stumbles in Europe and stock market volatility, said Chambers, who noted that Cisco historically sees economic trends earlier than peers.

However, Chambers stopped short of making a call on a double-dip recession. "We're not making a call on the economy," he said. The most likely scenario is that the economy grows, but very slowly. "I'm having more trouble reading this than ever before," said Chambers. Cisco's growth looks fine, but comments from customers gives Chambers a reason to pause.

On a conference call with analysts, Cisco also said the following:

  • It continues to see a challenging supply chain.
  • It had strong growth across most product lines and geographic regions.
  • Data center, virtualization and cloud computing are driving its core business lines. Emerging technologies - teleprescence, collaboration and the like - are showing strong growth.
  • Cisco added 2,000 workers in the fourth quarter not including acquisitions.
  • Orders were up 23 percent from a year ago, with emerging markets up 35 percent. Europe, North America and Asia Pacific were up more than 20 percent. India had order growth up more than 50 percent and Brazil.
  • Consumer revenue was flat, but public sector and enterprise revenue was up 23 percent to 25 percent.

By the numbers:

  • Days sales outstanding were 41 days in the fourth quarter, up from 39 days in the third quarter and 34 days a year ago. Wall Street is watching Cisco's inventory levels closely.
  • R&D spending was $5.27 billion in fiscal 2010, up from $5.2 billion.
  • Cisco generated cash flow from operations of $3.2 billion in the fourth quarter.
  • The company ended the fiscal year with $39.9 billion in cash, cash equivalents and investments.

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